The Role of Fintech in Expanding Financial Inclusion through Cross-border Payments

Financial inclusion is a key enabler for reducing poverty and boosting prosperity.  It refers to having access to useful and affordable financial products and services that meet people’s needs.  These include transactions,  payments,  savings,  credit,  and insurance.  

However,  1. 7 billion adults globally remain unbanked according to the World Bank’s Global Findex database.  Many of them cite high costs,  travel distance,  and paperwork as key barriers to accessing financial services.  

Fintech innovations are expanding access to financial services for the underserved by lowering costs,  increasing convenience,  and automating processes.  Cross-border payments facilitated by fintechs are playing a crucial role in driving financial inclusion,  especially for migrant workers sending money home.  

This article will discuss how fintechs are transforming cross-border payments to expand financial inclusion.  

Challenges With Traditional Cross-border Payments

Traditionally, cross-border payments have been slow, opaque, and expensive. They involve multiple intermediaries like correspondent banks along the payment chain. Here are some specific pain points:

High Costs

Banks and money transfer operators charge high fees and foreign exchange spreads on cross-border transfers. The average cost of sending $200 is around 7%, according to the World Bank. For smaller amounts sent more frequently, these charges can eat up a significant chunk of money sent. High costs are a key barrier to financial inclusion.

Low Speed

Typical cross-border payments take 3-5 working days for settlement. This is because of time-zone differences, batch processing of transactions, and delays in intermediary banks. The beneficiary often has an anxious wait before funds are credited.

Low Transparency 

Users have limited visibility on the status of the transfer, exchange rates applied, fees charged at each leg, and when the exact funds will be available to the recipient. This makes the process non-transparent.

Limited Access Points

Migrant workers sending money home often have to physically visit money transfer operators or banks during working hours to send money. This is inconvenient and costly in terms of time and travel.

How Fintechs Are Transforming Cross-border Payments

Financial technology companies are leveraging digital fintech solutions to introduce innovations across the cross-border payments value chain.

Simplifying On-ramps

Fintechs are making it easier for consumers to initiate cross-border transfers through mobile apps and online platforms. Recipients also have more options to receive funds digitally into a bank account, mobile wallet, or cash pickup point.

Optimizing Routing  

Instead of relying on the costly correspondent banking network, fintechs optimize routing using the most direct pathways between countries. They leverage payment rails like SWIFT and local payment systems to reduce intermediaries.

Enabling Faster Settlement

Technologies like distributed ledgers allow near real-time movement of funds across borders. Rather than batch transfers, each transaction gets settled individually. This enables direct account-to-account transfers in minutes rather than days.

Lowering Costs

Fintechs save costs by building direct connections between sending and receiving countries instead of relying on correspondent banks. They are also digitally focused with lower overhead costs. These savings get passed on as lower fees to consumers.

Increasing Transparency

Users get real-time notifications on transfer status via SMS or app notifications. Fintechs also provide upfront disclosures on forex rates and fees to the recipient. Some are taking it further by providing free forex rate guarantees.

Key Fintech Innovations Expanding Financial Inclusion

Here are some key innovations adopted by fintech players that are expanding access to cross-border payments for the underserved:

Mobile Wallets

Fintechs have partnered with mobile money wallets like M-Pesa, bKash, and Paytm to enable direct account funding via cross-border transfers. This brings the unbanked into the formal financial system. Wallets offer accessibility via mobile phones.

Digital Distribution

Fintechs are digitizing the cash payout process in receiving countries. Recipients can easily retrieve cash from retail outlets instead of visiting bank branches. Some fintechs have also built out extensive networks of cash pickup points.

Biometric Enrollment 

In emerging markets, recipients may not have government ID. Fintechs overcome this by enabling biometrics-based enrollment. Fingerprint, face scans or iris scans are used for verification and cash withdrawals.

Micro-transactions

New tech allows real-time transfer and settlement of micro-payments. This caters to migrant workers who frequently send small amounts. Fintechs enable transfers of even $10-$20 at low cost.

Remittance Marketplaces

Platforms like Remitly, TransferWise, and MoneyGram have created online marketplaces that aggregate various remittance options. This allows consumers to easily compare and choose the lowest-cost option for each corridor.

Examples of Fintechs Expanding Financial Inclusion

Here are some noteworthy examples of fintechs using the above innovations to further financial inclusion:

– WorldRemit partners with mobile wallets like M-PESA to enable digital disbursement in remote regions of Africa. They also have cash pickup locations across 130 countries. 

– InstaReM offers fast remittance settlements into bank accounts or mobile wallets in over 60 countries. They have competitive forex rates better than banks. 

– Remitly enables immigrants in the US,  UK,  Canada,  and Australia to send money digitally to emerging markets.  Senders can track transfers in real time.

– Azimo allows recipients to receive funds as a cash pickup,  home delivery,  bank deposit,  or mobile wallet top-up. They have also introduced remittance payments via Ripple’s blockchain network.   

– TransferWise provides transparent forex conversions and low-cost settlements into bank accounts globally. Users can send money in over 50 currencies.  

Impact on Financial Inclusion 

By reducing costs, and improving convenience and transparency, fintechs have unlocked cross-border payments for the underbanked. Some key impacts include:

– Cheaper remittances have reduced the average cost of sending $200 to under 3% as per World Bank estimates. This enables more frequent, lower-value transfers.

– Digital disbursement has brought in recipients in remote locations into the financial system. 20 countries now have over 1 million active mobile money accounts according to GSMA data.

– Alternate digital access points like retail stores and ATMs as cash pickup points to overcome the need for physical bank branches. This expands coverage.

– Competition from fintechs has also pushed incumbent remittance providers to reduce fees and accelerate settlement times.

– Faster, lower-cost flows have increased the volume of transactions. Global remittances are expected to touch $930 billion in 2022 as per the World Bank.

Challenges and Risks

While fintech-led remittance innovations have achieved scale,  some challenges and risks remain:  

Regulatory uncertainty – The governance of international payments and cryptocurrency adoption remains unclear.  Players have to navigate fragmented regulations across markets. 

Compliance burdens – Rising costs of monitoring payments for compliance with KYC,  and AML regulations can wipe out efficiency gains for fintechs. 

Data protection – With increased digital flows,  safeguarding user data privacy emerges as a key priority,  especially in developing countries. 

Financial risks – Many fintechs remain unprofitable as they compete aggressively on costs.  Models dependent on external funding are exposed to financial instability.   

Adoption barriers – Users still prefer cash and lack trust in digital transfers.  Infra challenges like connectivity and ID verification also remain.  

Looking Ahead

Cross-border payments are poised for greater digitization as fintechs leverage trends like blockchain, AI, and open banking. Incumbents are also adopting new rails and settlement models to remain competitive. Regulation is evolving with policymakers recognizing the need to balance innovation with risk management. 

While adoption barriers cannot be dismantled overnight, the long-term outlook remains optimistic. Fintechs have unleashed the potential for low-cost, real-time global money movement. Harnessing this has profound implications for advancing financial inclusion and equitable growth worldwide.